Mutual Funds May 2013

Report
Financial Planning for Women, May 2013
Dr. Jean Lown, FCHD Dept., USU
Advanced Family Finance Students:
Erica Abbott
Chelsie Jenkins
• You can invest with small $ amounts
• Even small $ grow to BIG $$$ with time
• It’s easy to get started
• Delaying is CO$TLY!
• Your financial security is in your hands◦ Shift to “retirement self-reliance” (CFP Elizabeth
Jetton)
2
• Today is the first day of the rest of
your life
• Regret has no place in planning for
the future!
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Investing in an IRA is the
first step to turning your
retirement dreams into
reality!
• Tax-advantaged investing
◦ Account growth is not taxed while it is growing
◦ When withdrawn $ may or may not be taxed
depending on whether it is a Traditional or Roth
• Must have earned income (or spouse with
earned income)
◦ Contribute up to $5,500/year
◦ + extra $1,000 for age 50+
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• Contributions are not deductible
• $ grows tax-free
• $ not taxed when withdrawn in
retirement
◦ after age 59 ½
• Traditional IRA offers upfront tax
deduction but Roth is better option
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• Higher risk (volatility) = higher potential returns
• Historic average annual rates of return
◦ Stocks: 8-9% (but can be VERY volatile)
◦ Bonds: 4-5%
◦ Cash equivalents: 3%
• Inflation averages 3.1%/year
◦ So cash gets you nowhere after taxes
◦ CDs are no way to invest for long term goals
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• For much more detail on IRAs: FPW website:
www.usu.edu/fpw click on: “past presentations”
◦ IRAs March 2006
◦ IRAs convert to Roth Nov. 2009
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• A company pools money from many
investors to buy a variety of securities
(stocks, bonds, etc.)
◦ Each investor owns a pro-rata share of diverse
portfolio
◦ Easy to match your investment objective
◦ Easy to purchase/sell shares
• Professional management
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

What is your favorite
cookie?
Chocolate chip?
◦ Stocks

Peanut butter?
◦ Bonds

Oatmeal raisin?
◦ Stocks & bonds

Other flavors…
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• Diversification
◦ Across asset classes (stocks, bonds, cash)
◦ Within asset classes (US & international securities; small,
medium & large companies)
• Never know which asset category will perform best in
future
• Callan Table:
http://www.callan.com/research/download/?file=periodi
c%2ffree%2f548.pdf
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• ALL funds charge management fees (expense ratios)
◦ % of fund assets (~.10% - 2.0%)
◦ Subtracted from fund assets before gains are distributed to
investors
• Compare Expense Ratios (%)
◦ Lower is better!
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• Load funds charge commissions
◦ ~5% of every dollar you invest, every time you invest
• Financial salespersons sell load funds
• No-load (no commission) funds
◦ Sold directly to investor (avoid middleman)
 web sites
 800 phone number
 mail
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



Index
Simply follows selected
index (i.e., S&P 500,
DJIA)
Buy & hold
Low management fees
Low turnover
Actively Managed



Higher management
fees
Higher turnover =
higher trading costs
Heavily advertised for
beating its index… in a
selected year
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• No guaranteed rate of return
• Returns follow market ups & downs
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• “Past performance is no guarantee of future returns.”
• Very difficult to beat “the market” in any 1 year &
even harder to do consistently
• The only thing you know about the future is the
expense ratio.
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• Most funds require a minimum opening deposit of
$1,000-$3,000
• Lower subsequent investments once in the door
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• Funds charge investors fees & expenses
• A high cost fund must outperform a low-cost fund to
generate the same returns
• Even small differences in fees can translate into large
differences in returns
• FINRA Fund Analyzer
◦ http://apps.finra.org/fundanalyzer/1/fa.aspx
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•
•
•
•
•
•
•
Invest $10,000
8% annual return before expenses
annual fund expenses of 1.5%
after 20 years: $
But if fund expenses = 0.5%
then you would have $
18% more $!
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• Index fund
• Target retirement date fund
• Diversified “Fund of Funds”
• Buy and hold all the securities (or representative
sample) that comprise the chosen index
• Follow ups and downs of selected index
◦ Can be very volatile
• Very low expense ratios due to low management costs
• Common indexes:
◦ S&P 500
◦ Dow Jones Wilshire Total US stock index
◦ Various international stock or bond indexes
• Objective – Track the Dow Jones US Total Stock
Market index
◦ Very diversified among US companies
◦ Expect high volatility!
• $100 Initial investment /$1 subsequent
• 0.09% expense ratio (ultra low!)
• http://www.schwab.com/public/schwab_oldpublicsite/research_strateg
ies/mutual_funds/summary/schwab/at_a_glance.html?&ticker_sym_nm
=SWTSX&schwabplan1=&type=
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Vanguard Target Retirement 2045 Fund
VTIVX
By Chelsie Jenkins
• Diversified portfolio of stocks, bonds & cash
• “Fund of funds”
◦ Composed of multiple funds from same ‘family’
• Target date: year investor plans to retire
◦ 5 year increments: 2025, 2030, 2035, etc.
• Assets are automatically re-allocated
• Allocation gradually changes from aggressive to
conservative as retirement nears
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Income Fund
Mid-Cap Fund
Bond Fund
Growth Fund
Large Cap Fund
500 Index Fund
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• Diversified among 3+ index MFs:
◦
◦
◦
◦
US stocks: total stock market index fund
International stocks: total international stock
Bonds: total bond market index fund
Additional funds as retirement nears
• $1,000 minimum initial; $100 subsequent*
• 0.18% expense ratio
• https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList
automatic investments: waives $20 annual fee <$10,000 & min. subsequent
investment
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• Vanguard Total Stock Market Index
• Vanguard Total International Stock Index
• Vanguard Total Bond Market II Index
• Expense ratio is 0.18%
• $20 annual account service fee if balance is
less than $10,000
◦ Fee waived with automatic monthly deposit
• $1,000 minimum initial deposit
• $100 minimum subsequent
◦ BUT… no minimum subsequent amount with automatic plan
• Based on sound investment principles
◦ Asset allocation
◦ Diversification
◦ Automatic rebalancing
◦ Become more conservative as retirement nears
• Little account maintenance required
◦ Set up automatic deposits
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• 4 min. video
• https://personal.vanguard.com/us/funds/vanguard/Ta
rgetRetirementList
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•
•
•
•
•
•
Fund of Funds: 11 actively managed funds
Broad diversification
Stable asset allocation: 60% stocks/ 40% bonds
$1,000 minimum initial; $100 subsequent
0.34% expense ratio
https://personal.vanguard.com/us/funds/snapshot?FundId=
0056&FundIntExt=INT
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• If you can afford $1,000 & like TDR fund:
◦ Vanguard Target Retirement Fund
• To start with low minimum ($100):
◦ Schwab Total Stock Market Index Fund
• For broadest diversification:
◦ Vanguard Star
• See previous May FPW presentations for more fund
recommendations:
http://www.usu.edu/fpw/schedule/powerpoints.htm
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• Consider a Mother’s Day Gift
◦ Give mom an IRA for Mother’s Day!
 Lasts longer than flowers
 Less fattening than chocolate
◦ If mom is not earning but Dad is, she is eligible for
a spousal IRA
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• Starting at age 27 Laura invested $5,000/yr. @ 8%
for only 10 years
• Starting at age 37 Jane invested $5,000/yr. @ 8% for
20 years
• Age 67:
◦ Laura has $778,000 (invested $50,000)
◦ Jane has $494,000 (invested $100,000)
◦ Difference = $234,000!
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• June 13: Preparing to buy your first home
◦ Preliminary steps to get your finances in order
• July 11: 529 college savings
• August: on vacation
• Sept. 11: Social Security- when to claim
◦ Financial planner Suzanne Dalebout
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• Blog replace the newsletter
◦ http://fpwusu.blogspot.com/
• Facebook:
https://www.facebook.com/FinancialPlanningforWomen
?fref=ts
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